|Tax-deferred contributions and earnings|
|Penalty for early withdrawa|
|Invest pre-tax dollars|
|Individual must have earned income|
|IRS Contribution limits|
|In most cases, withdrawals must begin by age 70½|
Saving Without Limits
Tax-Deferred Retirement Saving1
When saving for your later years, non-qualified annuities offer you the potential for tax-deferred earnings and a steady flow of income after you retire.
Pre-tax or After-tax?
The term “non-qualified” hints that there is another type of annuity, called “qualified.” So what are the differences? There are a few, as well as some similarities.
Qualified is just IRS language for funding with pre-tax dollars, meaning the contribution itself could qualify for a tax deduction, lowering taxable income. When you take a distribution from a qualified annuity, the entire distribution amount (contributions and earnings) is subject to ordinary income taxes.
A non-qualified annuity is funded with after-tax dollars, meaning you have already paid taxes on the money before it goes into the annuity. When you take money out, only the earnings are taxable as ordinary income.
Plus, you can purchase a non-qualified annuity regardless of whether or not you are covered under a retirement plan at work or if you have a Traditional IRA or Roth IRA.
Comparing Qualified and Non-qualified annuities
Here is a more complete list of the similarities and differences between qualified and non-qualified annuities:
|Penalty for early withdrawal|
|Invest after-tax dollars|
|No earned income requirement|
|No IRS contribution limits; WoodmenLife limits contributions to $25,000 per year.|
|No federal withdrawal rules, but there could be state laws|
|Qualified Annuities||Non-qualified Annuities|
|Tax-deferred contributions and earnings||Tax-deferred earnings|
|Penalty for early withdrawal||Penalty for early withdrawal|
|Invest pre-tax dollars||Invest after-tax dollars|
|Individual must have earned income||No earned income requirement|
|IRS Contribution limits||No IRS contribution limits; WoodmenLife limits contributions to $25,000 per year.|
|In most cases, withdrawals must begin by age 70½||No federal withdrawal rules, but there could be state laws|
Non-qualified Tax Advantages
- An additional income stream when you retire
- Earnings grow tax deferred until withdrawn2
- Longer age limits on contributions
- No Required Minimum Distributions at age 70½
You also need to consider how you will receive your non-qualified annuity proceeds at retirement. Typically, annuitants do this in one of three ways:
- A lump sum payment – could result in significant tax liability, especially if it moves you into a higher tax bracket
- Fixed payments for life
- A fixed amount for a certain period of time
Choosing one of the “fixed payment” alternatives spreads the tax liability over time, because only the earnings are taxed.